The 40-year-old's maiden appearance in the annual race ended when his Toyota crashed midway through the 330km stage around San Juan de Marcona, reports Xinhua news agency.
He was taken to hospital for checks before being discharged late on Tuesday night. His co-driver, Ruben Faria, was unscathed in the incident.
"Just to tell everyone that both me and Ruben are safe and well and back in the bivouac," Villas-Boas wrote on Instagram.
"We jumped off a dune and crashed the car nose first. The Dakar unfortunately is finished for us. Better luck next time! Thank you all for your kind messages of support."
Villas-Boas only began preparing for the race in November after quitting as manager of Chinese Super League side Shanghai Shenhua.
The former Porto, Chelsea and Tottenham manager said last week that he hopes to return to coaching in June.
More than 50 competitors have already withdrawn from this year's Dakar Rally, which is widely regarded as the world's most gruelling off-road endurance race.
(This story has not been edited by Social News XYZ staff and is auto-generated from a syndicated feed.)
